We are trying to figure out whether the following would be categorised as an Incident as per ITIL standards

A service was incorrectly coded at Application Development and Not noticed by anyone including QA.
The service went live and the problem was noticed only when a client reported the issue: ( This is a rarely used service)
Is this an incident, as the service was never available to be used correctly and as such was never a part of normal IT services.

Wow, I'm loving this case. You're right, it seems like a tricky question because the definition of an incident describes an interruption or degradation of a service. Since the service was introduced that way, that's its normal way of operating.

The normal operating level of a service needs to be measured from service level objectives that must or should be established based on the customer requirements. It is the level of promised availability that establishes the baseline from which departure represents an incident or not.

As far as IT is concerned, and for as far as IT has been measuring, the service was perfectly available until it was first used. It is on first use that an incident occured because the service was not as available as promised due to an error.

You have both an incident and an error, or at least a problem (if you don't know where the incident comes from).

Now, based on that experience, you may want to add a UAT step before or after QA in your SLC._________________BR,
Fabien Papleux

To most of our clients (and I would have to side with them), here's the breakdown...

The "Incident" is the disruption that was reported, like the report having bad data in it and/or failing.

The fact that someone deemed it to be "repeatable" instantly makes it a "Problem" that needs to be tracked and addressed, as part of the Problem/Defect Management process.

The fact that you determined it to be a coding error is the "Root Cause".

NOTE: It doesn't matter what environment it was reported in or who caught it. The breakdown should be the same, regardless of whether or not it was determined in any environment, such as Development, Testing, Production, etc. or by any stakeholder, such as a Developer, Tester, End User, etc.